BWPT value creation was at its lowest point in 2018 since it went public. EVA tumbled to Rp-1,687 Billions after we saw improvement in 2017. This company has never been a value creator since its inception. The setback in 2018 makes the road to become a positive NPV company looks tough at first glance.
The major reason for EVA contraction last year was a big setback in productivity gains, not its growth. Let’s break it down further.
This productivity gains could be measured by the change of EVA margin, or its cousin, ROIC. Both measures tend to go together, but I would prefer to take perspective in EVA margin for further analysis because it could be broken down in additive form. Important to mention from ROIC data is that 2018 was the first time it became negative in absolute term. From a value-creation perspective, it does not change my perspective significantly, because BWPT has never been able to exceed its WACC which I presume to be 11,5%.
Its productivity gain is worse, because its NOPAT margin took a heavy blow. As you might expect, the major reason is because gross margin sank due to poor CPO market price.
The good news lies in the elephant inside the room. While a lot of attention is in CPO prices, the chart shows that the major component of EVA margin in BWPT is the capital charge. It is really big, especially after BWPT’s huge land acquisitions back in 2014-2015.
Notice that capital charge, enormous as it is, has been declining since 2016. This is because the majority of its land has entered mature phase. Fixed assets growth, which include plants and lands, contracted by 0,7% between 2015-2018, while revenue grew on average by 4,9% during the same time.
Read here to see how much (and rapid) BWPT’s EVA growth could be in the case where no further plantation expansion is taking place in the future, which is the most likely scenario. While BWPT share price has high correlation with palm oil price, in my view, anyone investing in this stock without realizing this crucial factor (or lack thereof) is gambling unacceptable risk.
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